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Subject of IFUS Sanction for Alleged Non-Bona Fide EFPs Also Penalized by CFTC for Same Conduct

Michael Pucciarelli and Badge Trading LLC, a company wholly owned by Mr. Pucciarelli, agreed to pay a fine of US $280,000 and be barred from trading on any CFTC-supervised execution facility for four years as a result of engaging in “numerous” non-bona fide exchange for physical transactions from January 2010 to August 2012. Previously, in July 2014, Mr. Pucciarelli also agreed to settle charges by ICE Futures U.S. related to the same alleged wrongdoing by agreeing to disgorged profits of approximately US $514,018 and being subject to a two-year trading ban on all IFUS-operated markets. (Click here to access details of Mr. Pucciarelli’s prior IFUS settlement.) According to the CFTC and IFUS, during the relevant time, Mr. Pucciarelli was employed as a director of purchasing for an unnamed coffee roasting business. He purportedly engaged in 106 transactions where he entered into EFP transactions for Badge Trading, but in fact split the EFPs so that Badge would sell Coffee “C” futures, while the roasting company purchased the corresponding amount of physical coffee. (Under applicable IFUS rules, one party must be both the buyer of the related position and the seller of the futures contract, or the seller of the related position and the buyer of the futures contract. Split EFPs are not permitted.) Mr. Pucciarelli also purchased for Badge, in the open market, an identical quantity of Coffee “C” futures. Apparently, the short futures positions obtained by Badge through the EFPs were executed at higher prices than corresponding futures positions Mr. Pucciarelli purchased for Badge in the open market, thereby assuring him a profit when he offset the positions. The CFTC charged that Mr. Pucciarelli’s split EFP transactions constituted fictitious sales and resulted in non-bona fide prices being reported.

Compliance Weeds: The risk of executing any non-competitive trade is that, unless it is executed precisely in accordance with exchange rules, it is likely a violation of rules of the Commodity Futures Trading Commission. This is because the CFTC requires all futures transactions to be executed openly and competitively except for trades “executed non-competitively in accordance with written rules of the contract market which have been submitted to and approved by the Commission, specifically providing for the non-competitive execution of such transactions.” (Click here to access the full text of CFTC Rule 1.38.) Unfortunately, not all exchange rules addressing the same non-competitive transactions are identical – even on different markets of the same exchange group (Click here for examples of such different rules in the article, “CME Group Updates Its Pre-Execution Communication Rule to Reflect New Committed Crosses” in the January 31, 2016 edition of Bridging the Week.) Thus care must be taken to ensure that traders are aware of each exchange’s specific requirements and that they are followed faithfully.

My View: It always leaves the Commodity Futures Trading Commission open to second guessing when it brings a “me-too” enforcement action that alleges the same violation addressed in a prior self-regulatory organization’s disciplinary action (particularly when its enforcement action is filed almost two years later as in the instant matter). Unfortunately, the CFTC does not explain its thinking when it files such an action, particularly when there is a settlement. On the one hand, critics can fairly question whether a “me-too” action represents an appropriate expenditure of scarce agency resources. On the other hand, the CFTC can argue that the SRO action levied a sanction that was not sufficient given the severity of the alleged wrongful conduct. In the instant matter, IFUS was only able to ban Mr. Pucciarelli from trading on its markets. The CFTC could have reasonably determined that trading on all markets was a more appropriate penalty for conduct it considered egregious. Who knows – other than CFTC Division of Enforcement staff? At a minimum, the CFTC should ordinarily not file “me-too” actions except where there are particularly egregious circumstances.

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